The ex-Congressman and onetime economics professor lashes both Republicans and Democrats for their role in the financial meltdown.

Question: What thinkers influenced your views on economics?

Dick Armey: Well, I'm a free market economist and of course in terms of real living economists during the time that I made the transition, Milton Friedman and Thomas Sowell were probably the two most important people that I worked with. But historically, I followed the Austrian school and that would be von Mises and Hayek. Clearly, I've studied all the economists in the history of economic thought and I consider the Austrians the best.

Also, I was largely influenced by a unique American contribution called Public Choice Theory that was pioneered by Dr. James Buchanan in the state of Virginia. So, I would say that my intellectual gantry is substantively the Austrian School of Economics and methodologically, as I apply it to public policy, The Public Choice Theorists. It's a fairly good grounding in preparation for a career in politics, or in office.

Question: What caused the recession and how can we fix it?

Dick Armey: Well actually, when we saw the magnitude of the financial catastrophe, it was really quite alarming to me. I just couldn't imagine how could it get so big? So, I went back and I reviewed the history of economic analysis and I kind of hit on, I got an important question, when was the last time I did something foolish with money? Because basically, what you had was a lot of people making foolish, irresponsible decisions with money. And the last time I did something foolish with money was the last time I had easy money, which stands to reason.

So, I take a look at the last two or maybe three decades of too much, too easy money, plus a government that kept prodding bankers, in particular in the home building industry, into bad decisions. And so basically I was drawn to even a firmer understanding that the Austrian School was essentially their understanding of prices and then in particular the price interest rate as an allocative function.

What happened is we had kept interest rates too low for too long and it had allocated capital into what was essentially a consumer good use rather than the capital goods use. Compare that, for example, with the extremely important boom period we had in the '80's when capital was allocated into the new electronic sector of the economy, the enormous growth in industry and jobs that was pursuant to that, what we basically created was this massive big housing bubble and it was funded by banks that were irresponsible because of “too big to fail.” They thought the government would bail them out and the government eventually did. Fannie Mae and Freddie Mac were government sponsored enterprises that were just sort of running amuck with the belief the government would bail them out, and eventually the government did.

And then I think the innovation was that mortgage backed bonds which enjoyed, for a while, the benefit of lax bond rating agencies that really didn't understand what was inside the bond and gave them too high a ratings and a false sense of security, so there was a lot of irresponsibility to go around.

Essentially from the public sector prompting it and the private sector, Armey's Axiom is, "In the private sector all bad habits are habits learned from the public sector."

What happened was with President Bush, and particularly his big bailout, and the Republicans with their free spending, “buy myself a victory in the Kentucky race with the appropriations process,” they became the part of Big Government. In fact, we even started hearing this concept, "Big Government Conservatives" which to many of us was quite a baffling notion. Then, of course, they lost and the Democrats, the real professionals at big government, got elected and now they're winning. And so you see now the emergence of a real awakening of small government conservatism, not within the halls of Congress or legislative bodies, but within the streets of America and this is this enormous uprising you see from all over this country with this idea, "We've got to try to reform one of the two parties, most likely the Republican Party, into being once again the party of small government conservatism.”

Recorded on November 11, 2009
Interviewed by Austin Allen